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Ardent Leisure ((AAD)) has signalled a cautious outlook for its Main Event business, as the pace of rolling out new centres slows and sales momentum appears to have slackened after an up-tick in March.

The company has provided guidance for operating earnings (EBITDA) of $73-75m and Main Event contributing US$44-45m. A loss of -$2-4m has been reiterated for theme parks. After a positive March at Main Event, and the benefit of price increases, sales momentum has dropped back to negative, although the company is still suggesting a solid improvement on prior quarter trends. Brokers were disappointed with this aspect of the update, given the tailwinds that exist in terms of recent initiatives on food, refurbishment and advertising.

Ord Minnett sticks with a Hold rating, despite the upside risk to like-for-like sales on the back of the said initiatives, and suspects consensus estimates may be downgraded. The new CEO, Simon Kelly, has emphasised the importance of maintenance expenditure and the broker believes this is sensible for long-term returns.

Nevertheless, any further slowdown of guidance regarding the rolling out of centres could put pressure on the share price. Ord Minnett considers this scenario most probable and cannot find valuation support, even with the declines in the share price witnessed over the past three years.

Main Event

Deutsche Bank finds the weakness in sales and margins at Main Event of particular concern, as the company is relying on this division to drive earnings growth. This underscores wider concerns around strategy. The company has flagged specific issues at several centres as contributors to weakness, as well as a general lack of investment in older centres and weaker underlying conditions in some markets.

Deutsche Bank has a general issue with the adaptability of the concept to new markets and the resilience of the brand in the face of increasing competition. Deutsche Bank revises forecasts down to account for lower margins at Main Event and a more conservative roll-out strategy as well as slower return of foot traffic at Dreamworld, which was affected by a tragedy last year.

In terms of valuing Main Event, Citi is of the opinion that a 30% multiple discount is appropriate to competitor Dave & Buster, given that company's superior execution and a concept that is proven in more regions across America. If the discount were removed, Citi arrives at a valuation of $2.13, which is only 7% above the current share price.

This does not compensate for the risk that value has been eroded from the continuing underperformance of the operating business and the broker retains a Sell rating. Citi also notes FY17 guidance also implies bowling is underperforming expectations, either that or corporate costs have increased.

Citi is cautious about extrapolating an improving June run rate into FY18, as the competitive environment is intense and previous sales improvements proved to be unsustainable. Given the need to improve the underlying performance the broker envisages downside risk to the roll-out target of eight new centres and now expects just six in FY18.

Citi reduces FY17-19 earnings estimates by -17-24%. The broker acknowledges a takeover or corporate activity led by Ariadne/Viburnum represents the key risk to its recommendation.

Private Equity

Brokers are well aware of private equity interest on the share register, which is expected to support the stock on the downside. Short-term risks are also in focus, given a general meeting has been called for September 4, as Deutsche Bank notes certain shareholders are seeking to appoint four new directors in order to "fix" the group.

There are two Sell ratings on FNArena's database (Citi, UBS – yet to comment on this update), four Hold and one Buy (Credit Suisse – yet to comment on this update). The consensus target is $1.83, signalling -6.6% downside to the last share price. Targets range from $1.25 (Citi) to $2.25 (Credit Suisse).

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